The US government is spending $250bn buying stakes in leading banks as part of a plan to shore up the financial system — a move the Bush administration described as a reluctant intervention to tackle an unprecedented crisis.

To further kick-start lending, the US treasury will guarantee bank loans and the Federal Reserve become buyer of last resort for unwanted commercial debt.

In a televised address from the White House, President Bush described the steps as "unprecedented and aggressive" measures to address the financial crisis.

"This new capital will help healthy banks continue making loans to businesses and consumers," said Bush. "And this new capital will help struggling banks fill the hole created by losses during the financial crisis so they can resume lending and help support job creation and economic growth."

Acknowledging that the decision marks a sharp diversion from his administration's generally laissez-faire economic approach, Bush stressed that the measures would be temporary. "These measures are not intended to take over the free market but to safeguard it," he said.

The treasury will initially buy shares in Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America, Merrill Lynch, Citigroup, Wells Fargo, Bank of New York Mellon and State Street. All will be obliged to accept restrictions on executive compensation, including an end to "golden parachutes" for departing bosses and curbs on companies paying income tax on behalf of executives.

The chosen institutions include several banks which are in good health, such as San Francisco-based Wells Fargo, which still has a top-grade credit rating, to try to avoid any stigma that those involved are in need of urgent support. Thousands more local community banks will be eligible.

The plan was greeted warmly on Wall Street, where shares opened sharply higher. Building on yesterday's record surge of 936 points, the Dow Jones Industrial Average rose by 290 points to 9677 within a few minutes of the opening bell.

Buying shares in banks amounts to a sharp u-turn for the treasury secretary, Henry Paulson, who told Congress last month that such a move would be unwise. He initially favoured using a $700bn bail-out fund to clean up banks' balance sheets by purchasing distressed assets, but the stockmarket's plunge last week prompted him to consider more radical action.

Paulson left little doubt about his distaste for the measure. Speaking in the treasury's ornate Cash Room, he said: "Government owning a stake in any private US company is objectionable to most Americans — me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

The treasury's investments will be in return for preferred shares without conventional voting rights to avoid the spectre of the US government running banks on a day-to-day basis. Banks will be obliged to pay the treasury a 5% dividend for the first five years, with a 9% payout thereafter unless they buy back the shares.

Other measures in the plan include a broader guarantee for small businesses holding non-interest bearing current accounts. The Federal Deposit Insurance Corporation will guarantee transaction accounts to give the owners of companies greater peace of mind.

Although 13 high-street banks have failed in the US this year, the FDIC's chairman, Sheila Bair, sought to soothe anxiety over the condition of the industry.

"The overwhelming majority of banks are strong, safe and sound," she said. "A lack of confidence is driving the current turmoil, and it is this lack of confidence that these guarantees are designed to address."

To further support businesses struggling with the credit crunch, the Federal Reserve will intervene in the commercial paper market to buy short-term debt issued by companies — a practice which has already quietly begun.Ben Bernanke, chairman of the Federal Reserve, said: "We will not stand down until we have achieved our goals of repairing and reforming the financial system."

Experts expressed optimism that the plan would be effective in thawing the freeze in bank lending. Donn Vickrey, co-founder of Gradient Analytics, said: "Many of the basic foundations of the economy are reasonably sound, although shaken. We need to make those banks that have capital lend to one another, and for those that don't, we need to stabilise through capitalisation."

The US government's plan is very similar to measures adopted in Europe, following discussions over the weekend by finance ministers from the G7 nations. Britain's aggressive role in acting first to part-nationalise banks has won plaudits across the Atlantic. The Wall Street Journal heaped praise on the chancellor, Alistair Darling, under the headline: "UK sheds its reputation for bumbling."

"The biggest industry in the world is the housing industry and boy, did we take a hit when the housing industry went bad," Trump told CNBC television. "If you don't get banks to lend again, Main street is going to be in very big trouble."